Middle East companies must update procurement practices to counter effects of lower oil revenues,...

25 April 2015

New procurement approaches can release value for Middle East and central Asia businesses in the wake of reduced oil revenues, according to a consultant.

A PA Consulting expert has urged purchasing departments to adapt procurement models, following a warning from the International Monetary Fund that lower oil exports could drain $300 billion (£205 billion) from those regions.

Programme delivery expert Paul Ellis said current practices had the unintended consequence of driving costs through activities that don't add value.

"Adopting 'turnkey' contracting, for example, in an attempt to transfer risk and integration efforts to a single contractor for complex projects will almost inevitably attract risk premiums, contingency sums and added management costs," said Ellis.

"The hoped for reduced management effort and single point of accountability is seldom a reality in such cases, and the buying organisation itself inevitably picks up the consequences when things go wrong."

Ellis called for a more pragmatic approach to managing risks as Middle East businesses recover from the impact of reduced oil revenues. Placing responsibility and accountability with the party best positioned to manage mitigating actions, would eliminate non-value adding costs and enhance the chances of successful delivery, he said.

Procurement managers need to update their purchasing models as many processes widely employed in the region, such as bid bonds and performance bonds, are no longer prevalent in other parts of the world, according to Ellis.

"The very nature of a bond in itself attracts risk premiums, which further widens the gap between cost and delivered value,” he said. “Greater efforts to refine business requirements and more active management of the procurement process through market-making, active pre-qualification, imaginative contractual incentives and stronger vendor engagement would produce far better results for the purchasing organisation."

Ellis said he agreed with the IMF it was highly likely a sustained period of low oil prices would result in severe financial pressure on government and businesses across the Middle East to deliver their objectives in the prevailing market conditions.

By adopting an active management of cost, rather than leveraging price, procurement managers can optimise their delivered value and strengthen the relationships with their suppliers, Ellis said.

Embracing a more active management of integration and risk would also develop transferable commercial, project and programme management skills.

Ellis said: "Furthermore, raising the bar for the procurement profession will provide rich career opportunities across all sectors of the economy, repositioning procurement as a strategic driver rather than a service function at the heart of an organisation.

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